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Need a detailed paper on  IT investment project <Assessment Code: Task Title> NWM2: IT Project Analysis and Proposal Financial Formula Sheet Financial Formula Sheet Average investment = Average rate of return = Current ratio = Days’ sales outstanding = × number of days in the period (for a quarter, use 120 days) Debt ratio = Dividends per share = Earnings per share on common stock = Future value = present value × (1 + r)n, where r is the rate of return and n is the number of years Inventory turnover ratio = Market value = purchased price – selling price – selling expenses Net cash flow = net income + depreciation + amortization Net present value = expected cash inflows – amount to be invested Operating income = gross income - operating expenses – depreciation – amortization Present value factor = , where r is rate of return and n is number of years Present value of an annuity = sum of present value factors × initial investment Price/earnings ratio = Profit margin ratio = Quick ratio or acid test = Ratio of fixed assets to long-term liabilities = Ratio of free cash flow to sales = Ratio of liabilities to stockholders’ equity = Return on total assets = Return on common stockholders’ equity = Straight-line depreciation = Times interest earned = Working capital = current assets – current liabilities You may need to compute the weighted average cost of capital (WACC) based on non-percentage inputs or based on percentage inputs. There are two formulas below. The first formula should be utilized when the inputs you are given are percentages. The second formula should be used when inputs are not percentages. WACC with percentages. All projects must be entirely funded (100\%). Equity = e\% Cost of equity = coe\% Debt = d\% Cost of debt = cod\% Stock = s\% Cost of stock = cos\% WACC = Weighted average cost of capital (WACC) = PAGE 1 PAGE 2 TASK 1: IT PROJECT ANALYSIS AND PROPOSAL COMPETENCIES 4052.5.1 : Financial Management The graduate analyzes how financial information influences organization decision-making, operational sustainability, and productivity. 4052.6.1 : Budgeting The graduate creates IT capital and operating budgets that meet an organization’s mission and goals. 4052.7.1 : IT Procurement The graduate manages the acquisition and replacement of technology resources for an organization. INTRODUCTION During your career as an IT manager, you will be asked to conduct analyses to make well-reasoned financial decisions. It is important that you are able to not only complete an analysis but also communicate the support for your decisions to a CEO and board of directors. Your financial decisions will need to align with the mission and strategic goals of the company. Your responsibilities will likely include determining the budgets for an IT department, making financial decisions about IT projects and enhancements, and managing the procurement of technology resources. For Task 1 of this assessment, you will choose a publicly traded company from the list provided in the scenario. Once you have chosen a company, you will download the company’s recent quarterly financials (10-Q) from the SEC.gov web link. You will also need to read the attached Financial Fact Sheet” for the company you choose. This fact sheet will provide you with the company’s strategic goals and the information you will need to determine any project budgets. You will select one strategic goal for your chosen company and decide on an IT project that aligns with that goal. Your IT investment project idea must include a software component or a software as a service (SaaS) solution and be based on the information provided in the company’s “Financial Fact Sheet” regarding the initial cost of the project. At this point, you will be able to create an IT project analysis and proposal report that describes the company’s financial position, determines the budgets related to the project, and outlines how you will fund your idea for the IT investment project. The skills you showcase in completing this report will be useful in your career when conducting analyses and making financial decisions. This report may also be added to your portfolio to show to future employers. SCENARIO You are the chief information officer (CIO) of one of the following publicly traded companies: •  Apple Inc. (ticker symbol: AAPL) •  Ford Motor Company (ticker symbol: F) •  Walmart Inc. (ticker symbol: WMT) As part of your responsibilities, the CEO has asked you to review the company’s financial statements and determine the budget and cash flow for the IT department. The CEO would also like you to propose an IT project that includes a software component. In your project idea proposal, you will need to include how you will be funding this project idea and how it aligns with the company’s strategic goals and budgets. At the end of the IT project analysis and proposal report, you will provide a summary of the report’s key points. REQUIREMENTS Your submission must be your original work. No more than a combined total of 30\% of the submission and no more than a 10\% match to any one individual source can be directly quoted or closely paraphrased from sources, even if cited correctly. The originality report that is provided when you submit your task can be used as a guide. You must use the rubric to direct the creation of your submission because it provides detailed criteria that will be used to evaluate your work. Each requirement below may be evaluated by more than one rubric aspect. The rubric aspect titles may contain hyperlinks to relevant portions of the course. Tasks may not be submitted as cloud links, such as links to Google Docs, Google Slides, OneDrive, etc., unless specified in the task requirements. All other submissions must be file types that are uploaded and submitted as attachments (e.g., .docx, .pdf, .ppt). Create an IT project analysis and proposal report that will be presented to the CEO and board of directors for your chosen company by responding to prompts A–E. A.  Describe your idea for an IT investment project, referencing one of the strategic goals for your chosen company. The project must align with this strategic goal and include a software component or a SaaS solution.   Note: Your project should be focused on an operational IT solution, not a consumer product or service. This description could include the technologies involved and desired outcomes of the project. The project should be in alignment with the initial project costs outlined in the company’s “Financial Fact Sheet.”  Download the most recent quarterly financial statements (10-Q) for your chosen company, and review the attached “Financial Formula Sheet” and the chosen company’s “Financial Fact Sheet.”  B.  Describe the current financial position of your chosen company. The description must align with the company’s 10-Q financial statements and include the following components, along with a justification for each of the ratios used: •  net profit •  retained earnings •  liquidity ratios •  solvency ratios •  profitability ratios Note: You can use the attached “Financial Formula Sheet” to determine which ratios to use for liquidity, solvency, and profitability. Choose no fewer than two ratios for each component. 1. Attach the company’s 10-Q financial statements obtained from the SEC.gov web link to your submission as a spreadsheet. Note: Quarterly statements should be from within the last calendar year. After searching for the company on SEC.gov, you can download the 10-Q statements by clicking “Interactive Data” and then “View Excel Document.” You can then save the spreadsheet to submit with your report.   C.  Compile the budgeted income statement using the attached “Financial Fact Sheet” for your company. D.  Describe your IT procurement plan based on your company’s “Financial Fact Sheet,” budgeted income statement, and IT investment project idea. Include a description of the decisions you made regarding the following points: •  resources (e.g., software, personnel, hardware) •  leasing versus buying components Note: You may need to adjust the description of your IT procurement plan after you have completed part E.  1.  Justify the decisions you made regarding resources and lease versus buy components in your IT procurement plan, including a financial and technical benefit of each decision. E.  Explain how your IT investment project idea will be funded, including a detailed discussion of marginal cost of capital (MCC) that supports your project proposal, and based on the company’s “Financial Fact Sheet.” Include the following calculations in your explanation: •  weighted average cost of capital (WACC) •  average rate of return (ARR) •  net present value (NPV) F.  Provide a brief summary of your findings and recommendations using the key points from parts A–E. G.  Acknowledge sources, using in-text citations and references, for content that is quoted, paraphrased, or summarized. H.  Demonstrate professional communication in the content and presentation of your submission. File Restrictions File name may contain only letters, numbers, spaces, and these symbols: ! - _ . * ( ) File size limit: 200 MB File types allowed: doc, docx, rtf, xls, xlsx, ppt, pptx, odt, pdf, txt, qt, mov, mpg, avi, mp3, wav, mp4, wma, flv, asf, mpeg, wmv, m4v, svg, tif, tiff, jpeg, jpg, gif, png, zip, rar, tar, 7z RUBRIC WEB LINKS SEC EDGAR Company Filings https://www.sec.gov/edgar/searchedgar/companysearch.html Use this website to pull your chosen company’s financial statements. NWM3: IT Project Analysis and Proposal P A G E 1 Apple Inc. Financial Fact Sheet Strategic Goals for Apple Inc. (AAPL) 1. Innovate products to secure a greater share of customer spending on hardware, software, and/or digital content. 2. Expand technology to enable growth in digital content delivery. 3. Diversify product offerings to become less dependent on the sales of any particular product. Financial Facts NWM3: IT Project Analysis and Proposal Apple Inc. Financial Fact Sheet P A G E 2 Capital Budget Components Current cost of equity 10\% Current cost of debt 6\% Current cost of preferred stock 12.50\% Tax rate 32\% Expected Cash Flows from Project Initial cost of project 12,560,000$ Project life cycle 5 years Year 1 5,750,000$ Year 2 3,750,000$ Year 3 3,650,000$ Year 4 2,250,000$ Year 5 1,500,000$ Present Value of $1 at Compound Interest Year 6\% 8\% 10\% 12\% Year 1 0.943 0.926 0.909 0.893 Year 2 0.89 0.857 0.826 0.797 Year 3 0.84 0.794 0.751 0.712 Year 4 0.792 0.735 0.683 0.636 Year 5 0.747 0.681 0.621 0.567 Year 6 0.705 0.630 0.564 0.507 Year 7 0.665 0.583 0.513 0.452 Year 8 0.627 0.540 0.467 0.404 Year 9 0.592 0.500 0.424 0.361 Year 10 0.558 0.463 0.386 0.322 C928 Task 1 Guide TMW 210403 Page 1 of 8 A. IT Investment Project Choose Apple, Ford, or Walmart as the company you will analyze. Describe your idea for an IT investment project using one of the strategic goals listed in the Financial Fact Sheet for the company you chose. Include in your narrative: 1. The name of the company chosen for analysis. 2. The strategic goal (choose only one strategic goal) selected from the Financial Fact Sheet for the chosen company. 3. Write a narrative that: a. Explains why the project aligns with the strategic goal you chose. b. Provides a description of the software component or SaaS solution for your project. c. Describes the technologies involved and desired outcomes for your project d. Explains how your project aligns with the initial project costs given in the Financial Fact Sheet. B. Current Financial Position Metrics To provide answers for this section, you will need to download the most recent quarterly financial statements (10-Q) for your chosen company. To download the most recent quarterly financial statements for your chosen company: 1. Click on the link https://www.sec.gov/edgar/searchedgar/companysearch.html 2. Enter the ticker symbol for your chosen company (i.e., Apple “AAPL,” Ford “F,” and Walmart “WMT”) into the box labeled “Company and Person Lookup.” If more than one company is displayed, click on your chosen company from the list. 3. Click Classic Version in the upper -right corner of the webpage. 4. Click on the button labeled Interactive Data in the line for which the name in the leftmost column is 10-Q. https://www.sec.gov/edgar/searchedgar/companysearch.html C928 Task 1 Guide TMW 210403 Page 2 of 8 5. Click on the link View Excel Document located above the menu box on the left of the screen. 6. A dialogue box will open into which you can select the location on your computer where you want the 10-Q Excel file to be stored. 7. The Excel worksheet containing: (a) the Income Statement is in the second tab from the left that is labeled Condensed Consolidated Statemen and (b) the Balance Sheet is the fourth tab from the left that is labeled Condensed Consolidated Balance. VERY IMPORTANT: The Excel file containing your chosen company’s 10-Q financial statements that you download must be attached to your Task 1 submission. Description of the Current Financial Position Metrics To answer questions in this section, you will need to access (1) the 10-Q financial statements you downloaded from the SEC website and (2) the Financial Formula Sheet and chosen company’s Financial Fact Sheet that should be downloaded using the links located at the bottom of the Task 1 page under the heading Supporting Documents. Describe the current financial position of your chosen company. Note: You can use the provided Financial Formula Sheet to determine which ratios to use for liquidity, solvency, and profitability. Choose two ratios for each component. The description must align with the company’s 10-Q financial statements and include the following components, along with a justification for each of the ratios used: Net Profit Provide the net profit amount from the SEC 10-Q income statement (for Walmart, from the worksheet line Consolidated net income attributable to Walmart). Briefly discuss your interpretation of the net-profit metric. C928 Task 1 Guide TMW 210403 Page 3 of 8 Retained Earnings Provide the retained earnings amount from the SEC 10-Q balance sheet (for Walmart, from the worksheet line Retained Earnings). Briefly discuss your interpretation of the retained- earning metric. Liquidity Ratios Provide an analysis of liquidity by choosing two of the three current-position-analysis liquidity ratios described in section 4.3 of the uCertify course. Liquidity Ratio 1. Provide (1) the name for liquidity-ratio-1, (2) the formula for liquidity-ratio- 1 from the formula sheet, (3) the computed value of liquidity-ratio-1 for your chosen company, and (4) a brief analysis of liquidity-ratio-1. Liquidity Ratio 2. Provide (1) the name for liquidity-ratio-2, (2) the formula for liquidity-ratio- 2 from the formula sheet, (3) the computed value of liquidity-ratio-2 for your chosen company, and (4) a brief analysis of liquidity-ratio-2. Solvency Ratios Provide an analysis of solvency by choosing two of the three solvency ratios described in section 4.4 of the uCertify course. Solvency Ratio 1. Provide (1) the name for solvency-ratio-1, (2) the formula for solvency-ratio- 1 from the formula sheet, (3) the computed value of solvency-ratio-1 for your chosen company, and (4) a brief analysis of solvency-ratio-1. Solvency Ratio 2. Provide (1) the name for solvency-ratio-2, (2) the formula for solvency-ratio- 2 from the formula sheet, (3) the computed value of solvency-ratio-2 for your chosen company, and (4) a brief analysis of solvency-ratio-2. Profitability Ratios Provide an analysis of profitability by choosing two of the three profitability ratios described in section 4.5 of the uCertify course. C928 Task 1 Guide TMW 210403 Page 4 of 8 Profitability Ratio 1. Provide (1) the name for profitability-ratio-1, (2) the formula for profitability-ratio-1 from the formula sheet, (3) the computed value of profitability-ratio-1 for your chosen company, and (4) a brief analysis of profitability-ratio-1. Profitability Ratio 2. Provide (1) the name for profitability-ratio-2, (2) the formula for profitability-ratio-2 from the formula sheet, (3) the computed value of profitability-ratio-2 for your chosen company, and (4) a brief analysis of profitability-ratio-2. Company’s Overall Current Financial Position Summarize the overall financial position of the company based upon the metrics appearing in this section. You must use metrics to justify your evaluation of the company’s overall current financial position. C. Budgeted Income Statement Create an Excel worksheet for a Budgeted Income Statement using data from the Financial Fact Sheet for your chosen company following the directions provided and the content in section 8.4 of the uCertify course. Paste the cells of the completed Excel worksheet into this section. Following the Excel worksheet, include a narrative that discusses assumptions you made in creating the Budgeted Income Statement. D. IT Procurement Plan IT Procurement Plan Description Describe your IT procurement plan based on your chosen company’s Financial Fact Sheet, Budgeted Income Statement, and IT investment project idea. Justification of the elements of your plan is important, including both technical and financial benefits of each recommendation/decision. IT Procurement Plan Resources Discuss in detail the resources (i.e., software, personnel, hardware) that will be required to implement your IT procurement plan based on your chosen company’s Financial Fact Sheet, C928 Task 1 Guide TMW 210403 Page 5 of 8 Budgeted Income Statement, and IT investment project idea. Justification of the resources needed to implement your plan is important, including both technical and financial benefits of each recommendation/decision. IT Procurement Plan Leasing Versus Buying Discuss the procurement plan for your IT project from a perspective of buying versus leasing based on your chosen company’s Financial Fact Sheet, Budgeted Income Statement, and IT investment project idea. Justification of the lease versus buy decisions you make is important, including both technical and financial benefits of each recommendation/decision. Note: You may need to adjust the description of your IT procurement plan after you have completed part E. E. Funding the IT Investment Project Plan and Justification for Funding the IT Investment Project Investment Project Data for Funding the IT Investment Project. Using your chosen company’s Financial Fact Sheet, provide the following dollar amounts and percentages that are the basis for your IT investment project funding plan: 1. The dollar amount of common equity for the proposed project. You should use a number that you create that causes the WACC value computed in section E.3 to be about 6\%, 8\%, 10\%. or 12\%. 2. The dollar amount of preferred stock for the proposed project. Apple, Ford, and Walmart do not have preferred stock so you should use a created amount of preferred stock that causes the WACC value computed in section E.3 to be about 6\%, 8\%, 10\%. or 12\%. 3. The dollar amount of debt for the proposed project. You should use a number that you create that causes the WACC value computed in section E.3 to be about 6\%, 8\%, 10\%. or 12\%. C928 Task 1 Guide TMW 210403 Page 6 of 8 4. The dollar amount of total capital (the Initial Cost of Project from the Financial Fact Sheet) for the proposed project, which is the sum of the common equity, preferred stock, and debt. 5. The percentage of total capital represented by common equity for the proposed project (divide dollar amount of common equity for the proposed project by dollar amount of total capital for the proposed project). 6. The percentage of total capital represented by preferred stock for the proposed project (divide dollar amount of preferred stock for the proposed project by dollar amount of total capital for the proposed project). 7. The percentage of total capital represented by debt for the proposed project (divide dollar amount of debt for the proposed project by dollar amount of total capital for the proposed project). 8. The tax rate of the company for your project. Plan for Funding the IT Investment Project. Based on the data and percentages appearing in the previous section (taken from your created numbers, Financial Fact Sheet, and the contents of uCertify section 14.2), explain in detail how your IT investment project idea will be funded. Note that the results of the calculations appearing in sections E.2 through E.6 will provide the sources of the data used in this section. Justification of the Plan for Funding the IT Investment Project. Provide a detailed narrative in which you Justify your funding plan using the results of the calculations appearing in the following four sections, stating any assumptions you make. Marginal Cost of Capital Answer this question using the WACC value from the following section. C928 Task 1 Guide TMW 210403 Page 7 of 8 Weighted Average Cost of Capital Answer this question using your chosen company’s created numbers, Financial Fact Sheet, the methodologies of uCertify section 14.2, and the data for common equity, debt, and preferred stock computed in the beginning of this section. Be sure to provide: (1) the formula for computing the Weighted Average Cost of Capital (WACC), (2) the component numbers for the WACC formula for your project, and (3) the number resulting from evaluating the WACC formula. Average Rate of Return Answer this question using your chosen company’s created numbers, Financial Fact Sheet, the methodologies of uCertify section 11.2, and the data for common equity, debt, and preferred stock in the earlier part of this section. Be sure to provide: (1) the formula for computing the Average Rate of Return (ARR), (2) the component numbers for the ARR formula for your project, and (3) the number resulting from evaluating the ARR formula. Net Present Value (NPV) Answer this question using your chosen company’s created numbers, Financial Fact Sheet, the methodologies of uCertify section 11.3, and the data for common equity, debt, and preferred stock in section E.1.1 above. Be sure to provide: (1) the formula for computing the Net Present Value (NPV), (2) the component numbers for the NPV formula for your project, and (3) the number resulting from evaluating the NPV formula. F. Summary of Findings and Recommendations Briefly provide a summary of your findings and recommendations using the key points from parts A–E. C928 Task 1 Guide TMW 210403 Page 8 of 8 Formatting Task 1 WGU follows the APA writing standard for all papers written for task submissions. If you need help with APA formatting or citing sources in this or other papers, please visit training provided by the writing center at https://www.hippocampus.org/HippoCampus/?user=WritingCenter&playlist=Using+Sources+and+APA You are encouraged to format Task 1 with a running head like the one used with this guide. You can copy the running head from this guide into your paper changing the text in the running head to the following (makeup your own heading text if you wish): “Your Name - C928 Task 1” https://www.hippocampus.org/HippoCampus/?user=WritingCenter&playlist=Using+Sources+and+APA Western Governors University C928 Financial Management for IT Professionals- Performance Assessment Presenting to board of directors  As part of your responsibilities, the CEO has asked you to review the company’s financial statements and determine the budget and cash flow for the IT department. The CEO would also like you to propose an IT project that includes a software component. In your project idea proposal, you will need to include how you will be funding this project idea and how it aligns with the company’s strategic goals and budgets How does your project align with the company strategic goals  Strategic Goals for Walmart Inc. (WMT)  1. Increase the average transaction amount per consumer visit to the store and website.  2. Improve analytics to ensure inventory levels are well aligned with consumer demands.  3. Reduce costs related to procuring and delivering the product to the consumer. Your projects can range from 2,000,000 to 19,500,00.  NOTE: This is a lot of capital, put some thought into your IT project, what would it mean to the company, what justifies the spend and are you prepared to ask for that The SEC website  Search Overview There are multiple methods for accessing a publicly traded company’s financial documents, but this lesson will focus solely on the SEC’s EDGAR Search tool. EDGAR is the electronic data gathering, analysis, and retrieval system used at the U.S. Securities and Exchange Commission (SEC); it is the primary system for publicly traded companies to submit documents as required by federal law. To learn more about the EDGAR Search tool, go to https://www.sec.gov/edgar/about. Understanding why fiscal years can matter Liquidity and why does it matter matter: You need to explain your numbers  A high liquidity ratio indicates that a business is holding too much cash that could be utilized in other areas. A low liquidity ratio means a firm may struggle to pay short-term obligations.  One such ratio is known as the current ratio, which is equal to:  Current Assets ÷ Current Liabilities.  This ratio reveals whether the firm can cover its short-term debts; it is an indication of a firm’s market liquidity and ability to meet creditor’s demands. Acceptable current ratios vary from industry to industry. For a healthy business, a current ratio will generally fall between 1.5 and 3. If current liabilities exceed current assets (i.e., the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, the company may be inefficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management.  The acid test ratio (or quick ratio) is similar to current ratio except in that it ignores inventories. It is equal to:  (Current Assets – Inventories) Current Liabilities.  Typically the quick ratio is more meaningful than the current ratio because inventory cannot always be relied upon to convert to cash. A ratio of 1:1 is recommended. Low values for the current or quick ratios (values less than 1) indicate that a firm may have difficulty meeting current obligations. Low values, however, do not indicate a critical problem. If an organization has good long-term prospects, it may be able to borrow against those prospects to meet current obligations.  A firm may improve its liquidity ratios by raising the value of its current assets, reducing the value of current liabilities, or negotiating delayed or lower payments to creditors. Solvency and why it matters (in millions) Target Wal-Mart Net Income $2,737 $14,293 Depreciation $2,298 $10,080 Net Income + Depreciation (A) $5,035 $24,373 Short-Term Debt $12,708 $66,928 Long-Term Debt $11,031 $36,015 ST Debt + LT Debt (B) $23,739 $102,943 Solvency Ratio = (A)/(B) 21.21\% 23.68\% Example of the Solvency Ratio in Use Companies in debt-heavy industries like utilities and pipelines may have lower solvency ratios than those in sectors such as technology. To make an apples-to-apples comparison, the solvency ratio should be compared for all utility companies, for example, to get a true picture of relative solvency. Take a look at the solvency ratios for Target Corporation and Wal-Mart Stores for the fiscal year ended January 28, 2017. Both Wal-Mart and Target have solid solvency ratios lying above 20\%. This means that they are able to close out their long-term debt obligations when they come due using operating income. Lenders looking through a companys financial statement will usually use the solvency ratio as a determinant for creditworthiness. Profitability and why it matters  Gearing for Profit Another term for leverage is financial gearing. Exxon Mobil Corporation, a worldwide-integrated energy company, is an example of a company that uses leverage for financial advantage. Exxon had a return on total assets of 9.35\% for a recent year, while its return on stockholders equity was 18.7\%. Thus, Exxon is geared 2:1 by using debt on its balance sheet. Exxon is very profitable, thus leverage is beneficial. In contrast, Chesapeake Energy, an oil and gas exploration company, had return on assets of −7.5\% for a recent 12-month period, and return on stockholders equity of −25\%. In this case, the over 3:1 leverage (25\% ÷ 7.5\%) creates a financial disadvantage because the company is experiencing losses. The Budgeted Income Statement isn’t just about the numbers Leasing versus buying.  Describe your IT procurement plan based on your company’s “Financial Fact Sheet,” budgeted income statement, and IT investment project idea. Include a description of the decisions you made regarding the following points:  • resources (e.g., software, personnel, hardware)  • leasing versus buying components  Note: You may need to adjust the description of your IT procurement plan after you have completed part E.  1. Justify the decisions you made regarding resources and lease versus buy components in your IT procurement plan, including a financial and technical benefit of each decision. Capital expenditure budget and Cash Budgets point  The capital expenditures budget should be integrated with the operating and financing budgets. For example, depreciation of new manufacturing equipment affects the factory overhead cost budget. The plans for financing the capital expenditures also affect the cash budget.  Note  Be careful when using the cash budget for any investment project. Do not use all available cash for any project. Marginal Cost of Capital: What is in scope for this course and what do I need to provide? Break Point = NI × (1 - DPR) We Marginal cost of capital is the weighted average cost of the last dollar of new capital raised by a company. It is the composite rate of return required by shareholders and debt-holders for financing new investments of the company. It is different from the average cost of capital which is based on the cost of equity and debt already issued. The weighted average cost of capital (WACC), the most common measure of cost of capital used in capital budgeting and business valuation, is the weighted average of the marginal cost of common stock, marginal cost of preferred stock and marginal after-tax cost of debt. The distinction between average cost of capital and marginal cost of capital is important. The marginal cost of capital rises as the company raises more and more capital. This is because capital is scarce, just like any other factor of production, and must be compensated through a higher required return. The return available on new projects must be compared with the marginal cost of capital and not the average cost of capital and the projects should be accepted only when the expected return is higher than the required return. Marginal cost of capital increases in steps and not linearly. This is because a company can finance a certain portion of new investments by reinvesting earnings and raising enough debt and/or preferred stock to maintain the target capital structure. The reinvestment of earnings comes without any increase in cost of equity. However, as soon as the expected capital exceeds the combined amount of retained earnings and debt and/or preferred stock raised to maintain the target capital structure, the marginal cost of capital increases. Figuring out the WACC, ARR, and NPV Present value factor Note: If you don’t have my WACC match up to one of the percentages use the present value facture formula to calculate the present value. How do I know that I am right?